ELSS - Equity Linked Saving Schemes
What is ELSS?
A mutual fund investment pools money from many investors and attempts to reward them with
profit. This profit is generated through investments in companies and income-generating
opportunities. The profits earned by the fund scheme are distributed amongst the investors in
the form of regular payouts or a large one-time payment at the end of the fund’s tenure.
Tax saving mutual funds like ELSS do the same thing, but also give enable you to obtain
exemption of up to Rs.1,50,000 of your annual income from tax in India.
Investments that can provide the highest yield are equity investments - but these are
considered to be high-risk. Lower-risk investments in debt instruments also exist, but they
cannot match the high returns provided by equity investing. Mutual funds differ primarily based
on the type of asset class. There are three primary types of mutual funds on this basis:
Equity-oriented funds - which invest primarily in stocks and shares of
companies.
Debt-oriented funds - which invest primarily in treasury bills, certificates
of deposit, bonds, etc. of companies and the government.
Hybrid funds - which invest in a mix of both. A
hybrid fund can be either an equity-oriented hybrid
fund or a debt-oriented hybrid fund depending on where at least 65% of its corpus has been invested.
Equity Linked Savings Schemes (ELSS), as the name suggests, invest primarily in equity.
ELSS pools money from many investors and invests most of it into stocks and shares of companies
and invests the remainder into fixed income securities like bonds. The fund has a 3-year
lock-in for investors, meaning that the fund manager has a 3-year timeframe in which to
maximize the possible returns on investment. This investment avenue has gained a lot of
popularity in recent years as a way to save on taxes - as Indian taxpayers can reduce their
taxable income by Rs.1,50,000 under Section 80C of the Income Tax Act, 1961. Income earned at
the end of the 3-year tenure is also exempted from taxation if it’s under Rs.1 lakh, any income
over Rs.1 lakh is taxable at 10% under Long-Term Capital Gains (LTCG) tax.
Why invest in ELSS?
ELSS allows Indian citizens to reduce their taxable income by Rs.1,50,000 under Section 80C.
There are other investment options that help save under this same Section, but ELSS offers the
lowest lock-in obligation of 3 years and the possibility of the highest returns. The funds
invested in ELSS schemes are exempted from taxation, but if the returns on investment are
greater than Rs.1 lakh, they are charged tax at 10% under LTCG.
ELSS investments have historically provided excellent returns when compared to similar forms of
investment. This investment avenue is also popular with experienced investors who wish to add
an equity component to their existing investment portfolio
When is the best time to invest in ELSS?
Investments in ELSS can be made at any time
during the year. Most often, however, ELSS investments see a spike in popularity just before
the tax filing season, as Indians scramble to reduce their tax liability by any means possible.
Tax saving mutual funds get very popular around this time. Thus, those that invest in ELSS at
the end of the financial year will definitely save on taxes, but have almost no chance to
benefit from any capital growth nor receive any dividends in that financial year.
The best time to invest in ELSS is at the start
of the financial year, i.e. after April 1st. Since ELSS is an equity-oriented investment, it’s
a good idea to average out the Rupee-cost by investing in ELSS every month through SIP.
Systematic
Investment Planning (SIP) allows investors to get the most bang for their buck by
providing a higher number of fund units when prices are low, and fewer units when prices are
high - thus averaging the cost per unit over time. Thus, regular SIP investments in ELSS has
the potential to provide the highest returns along with being a tax-saving investment.
How to invest in ELSS?
Here’s a step-by-step guide to investing in
ELSS mutual funds:
Step 1 - Research: Finding the
right ELSS fund
to suit your needs is the first step in ELSS investing. There are thousands of ELSS funds on
offer from hundreds of AMCs, banks, and fund houses. Fortunately, FundsIndia’s expert
investment team can help point investors in the right direction and guide them through the ELSS
investment process for free.
Step 2 - Deciding the amount:
The primary
benefit of ELSS investments is the fact that they are tax-saving investments. A total of
Rs.1,50,000 can be saved from taxation under Section 80C, but any amount over Rs.1,50,000 will
not qualify for tax benefits. That being said, if the investor has an existing investment under
Section 80C (like a 5-year FD, PPF, etc.) only the remaining amount (Rs.1,50,000 minus other
Section 80C investments) will qualify for tax deductions.
Example: If Mr. Anand has invested Rs.60,000 in a 5-year fixed deposit, he will only be able to
claim tax benefits on Rs.90,000 of his ELSS investments under Section 80C (even if he has
invested more than Rs.90,000 in ELSS). This is because Rs.60,000 + Rs.90,000 = Rs.1,50,000.
Step 3 - Investing: The
standard process of
investing involves endless hours of paperwork and trips to and from the fund house, AMC, or
bank through which the investment is being made. FundsIndia offers a paperless, hassle-free,
and efficient investment platform through which investments can be made almost instantly and
tracked in a fully secure online environment.
Step 4 - SIP or Lump Sum: Once
the fund scheme
has been selected, the investor must decide between investing the amount in a large lump sum,
or in smaller and regular installments. The main benefit of investing small amounts regularly
through SIPs is Rupee cost averaging - more units are purchased when the price is low and vice
versa - making full use of market fluctuations to benefit the investor.
Step 5 - Redemption:
Redemption of an ELSS
scheme means selling off your invested interest in the scheme and earning any profit due from
the investment. ELSS has a minimum lock-in period of 3 years to make use of tax benefits. The
fund can be allowed to grow beyond 3 years as well in order to generate maximum returns.
Where to start investing in ELSS?
You can begin your ELSS investment here -
http://www.fundsindia.com/elss.html. FundsIndia provides a completely free, paperless, and 100%
secure online platform from which you can start, manage, and stop your investments.
Start investing in ELSS right now to save on
taxes and earn market-beating returns. FundsIndia has a team of dedicated and award-winning
investment experts that can help you find the best ELSS scheme.
Benefits of ELSS
Given below are some of the advantages of ELSS
and benefits of investing in ELSS funds:
Saves up to Rs.1,50,000 of annual income from taxation.
Earns the highest possible returns offered by any tax saving investment (as proven by
historical ELSS performance data).
Lowest lock-in period of 3 years among all other tax saving investments.
Helps during online income tax e-filing as all the details are made available online as well.
Works as a great last-minute income tax saving investment, as platforms such as FundsIndia can
readily assess an individual’s investor profile and suggest the best plans.
Possible to invest via SIPs - meaning that a lump sum investment is not required, and all the
tax benefits still apply.
Dividend and growth options - ELSS mutual funds allow investors to choose how their profits
earned are treated and paid back - either as regular dividends or as a lump sum on maturity.
How to claim a tax deduction with ELSS
Given below is a step-by-step guide on how to save on taxes with an ELSS investment online.
Assuming that the entire Section 80C quota of Rs.1,50,000 has been invested in ELSS:
Step 1: Visit your chosen
online income tax
e-filing portal, and log in to begin filing income tax return.
Step 2: Upload your Form 16 as
provided by your
employer, or furnish a form 16 on PDF and upload the same into the online tax filing portal.
Step 3: Once the basic
information has been
auto-populated, find “Deductions under Section 80C” and look for “ELSS” or “Mutual Fund”
Step 4: Enter the invested
amount (Rs.1,50,000
in this case) and hit submit. The online tax filing platform will register the same and show
you your annual taxable income with tax liability reduced by Rs.1,50,000.
Step 5: The platform will also
inform you if
you are eligible for an Income Tax refund that year, or whether you still have an outstanding
tax liability.
Step 6: Finish filing taxes as
per prompts from
the tax filing website and await email confirmation from the Income Tax department once they
receive your file.
Best ELSS Funds to Invest in 2020-2021
ELSS Mutual Fund schemes in 2020-21 ranked by the number of investors/total
AUM
Top ELSS Funds ranked by 3-year returns
Taxation of ELSS
Every Indian citizen is under the obligation to pay taxes to the government on the basis of
their income. But not all Indians earning the same amount pay the same taxes - because it’s
possible to save a large amount of income from the taxman just by following a few easy steps.
The amount of income on which tax is levied can be reduced drastically through the right
investments. These reductions in the total taxable amount come in the form of “Sections” of the
Income Tax Act, 1961. For example, under Section 80C, an amount of Rs.1,50,000 can be made
totally tax free by investing it in certain specified avenues - one of these avenues is ELSS.
The biggest benefit of ELSS over regular equity mutual fund schemes is the fact that
to
Rs.1,50,000 can be saved from taxation in a particular financial year if it’s
invested in ELSS.
There is a mandatory lock-in period of 3 years for all ELSS schemes. While it is a tax saving
mutual fund scheme, it does have certain taxes that apply in certain cases:
Is ELSS taxable after 3 years?
Currently, returns on ELSS schemes are taxed at 10% (without indexation benefit) if they exceed
Rs.1,00,000 in any financial year. The reintroduction of LTCG Tax (Long Term Capital Gains Tax)
caused a lot of confusion to ELSS investors. However, there is no taxation on returns on ELSS
mutual fund schemes if the returns are under Rs.1,00,000 in a financial year. You can still
claim a deduction of Rs.1,50,000 on your taxable income after investing in ELSS.
Tax saving investments under Section 80C of the Income Tax Act, 1961 :
There are many tax saving investments possible under Section 80C, and the maximum that can be
invested in any of them singularly or together is Rs.1,50,000. Even if an individual chooses
multiple Section 80C investment opportunities at different amounts, only Rs.1,50,000 of the
total investment will be considered as a tax saving investment.
Five-year Fixed Deposits (FDs):
The most common form of tax saving
investment, the 5-year
FD offers a slightly better rate of interest than regular savings bank accounts, and locks
invested funds for a period of 5 years. A total of Rs.1,50,000 can be exempted from taxable
salary under Section 80C with the 5-year FD investment.
Here are some of the best 5-year FDs/top tax saving FDs offered by
banks:
| Bank |
General rate of interest (per annum) |
Rate of interest for senior citizens (per annum) |
| ICICI Bank
|
6.50% |
7.00% |
| Axis Bank |
6.25% |
6.50% |
| SBI |
6.25%
|
6.50% |
| HDFC Bank |
6.00%
|
6.50% |
| Citibank |
5.00% to 5.25%
|
5.50% |
Public Provident Fund (PPF):
The Public Provident Fund or PPF is a voluntary retirement saving scheme offered - and
guaranteed - by the Indian government. A total of Rs.1,50,000 can be saved from taxable salary
annually through investments in this fund. This is also a tax saving fund. The PPF has a
mandatory lock-in period of 15 years and offers an average rate of interest of around 7.7% so
far, but this rate is subject to change based on various factors. The PPF scheme also allows
for loans to be taken out against the balance in the PPF account.
National Pension Scheme (NPS):
The National Pension Scheme also allows for a total deduction of Rs.1,50,000 under Section 80C,
and offers additional deductions of Rs.50,000 under Section 80CCD(1b) and up to 10% of an
employee’s salary, deposited by the employer, under Section 80CCD(1). In this way, a total of
Rs.2 lakh can be saved from taxable income using NPS. However, only 40% of the total corpus is
tax-free on maturity. Moreover, the NPS requires redeeming investors to reinvest 40% of their
corpus into an annuity scheme which will provide a regular (taxable) pension - meaning that the
investor can’t really own this investment fully as it is bound by many restrictions and rules.
In addition to this, the NPS funds mature only once the investor reaches retirement age, thus
making it the investment with the longest lock-in period.
Sukanya Samriddhi Yojana (SSY):
This investment option allows for investments to be made in special SSY accounts, which offer a
slightly higher rate of interest than PPF. The invested amount (up to Rs.1,50,000) is tax
deductible under Section 80C, and the interest earned on this account at maturity is also
exempted. This account can only be opened by a taxpayer in the name of their own female
children/dependant girl child under the age of 10 with a minimum investment of Rs.1,000. The
idea behind this is to create a corpus of savings for the girl child to use (for marriage,
education, etc.) when she comes of age. Average returns on this scheme are just shy of 8.1%.
Senior Citizens’ Saving Scheme:
As the name suggests, this tax saving investment option is only available to senior citizen
investors, i.e. investors over the age of 60 (58 in cases of voluntary retirement where the
taxpayer has not taken up another job). The scheme offers returns at the rate of 8.3% and has
an investment cap of Rs.15 lakh per taxpayer. Redemption can be done before the scheme reaches
maturity, but a penalty of 1.5% is charged if the account is closed within 2 years, and 1% if
it is closed after 2 years.
Unit Linked Insurance Plans (ULIPs):
These are insurance policies that also invest in equity or debt instruments and provide capital
appreciation or regular income for the investor. ULIPs provide insurance as well as a tax
saving investment. The average rate of return for the most aggressive ULIPs is around 20% in
the last one year and roughly 11.96% over the last five years. Investors can switch between
debt and equity without paying any penalties or switching charges. Not only is the invested
amount tax-free, but the capital gains earned are also exempt from taxation under Section
10(10D).
National Savings Certificate (NSC):
This tax saving investment is guaranteed by the government and is backed by sovereign reserves.
The average rate of return offered on these deposits is currently around 7.6%. Any interest
earned on the deposit is also eligible for deduction under Section 80C in the years following
the investment. There is a mandatory lock-in period of 5 years with this investment.
Life Insurance:
Owning a
regular life insurance policy on which regular premiums are paid is another way to save up to
Rs.1,50,000 from taxable income. Although not very popular as tax saving instrument, most
Indians own life insurance policies and, as a result of this fact, save a certain amount of
their income from taxation. This avenue offers the lowest returns at just 4% - 5%, but most
investors are drawn in by the ‘high’ maturity figure quoted by agents - not accounting for
inflation or the time value of money which greatly reduces the actual value of these huge
maturity amounts.
Pension Plans:
Insurance
companies offer pension plans, which essentially help put aside a certain sum and then repay it
when the investor reaches retirement age. Upon redemption, most pension plans allow for a full
withdrawal but some demand that at least 25% of the redemption amount be reinvested into an
annuity that pays regular dividends (similar to NPS). A massive 67% of the total corpus is
taxed again on redemption/maturity making these a less popular form of tax saving investment.
Equity Linked Saving Scheme (ELSS):
The most popular and rewarding form of tax saving investment, which incidentally also carries
the shortest lock-in period, is ELSS. These are tax saving-cum-investment schemes offered by
most banks, fund houses, AMCs, etc. and come with a host of benefits. Firstly, any amount up to
Rs.1,50,000 invested in ELSS is exempted from income tax. Unlike other investments which
passively gather interest until maturity, ELSS investments invest actively in equities and
explore investment opportunities to provide the highest possible capital appreciation. The
lock-in period for this investment is 3 years, which is the shortest among all tax-saving
investments which range from 5 to 35 years.
Comparison of tax saving investments in India
| No. |
Investment |
Lock-in Period |
Average returns |
Taxation Rules |
| 1.
|
5-year FD |
5 years |
7.5% |
Any amount invested/deposited up to Rs.1,50,000 can
be deducted from total
annual taxable income under Section 80C.
Interest earned is taxable at maturity
|
| 2.
|
PPF |
15 years |
7.7% |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
Interest earned is not taxable on maturity.
Amounts withdrawn prematurely are not taxable
|
| 3.
|
NPS |
30 years - 35 years |
9.5% |
A total of Rs.2,00,000 can be deducted from the total annual taxable
income
- Rs.1,50,000 under Section 80CCD, 10% of the basic pay (contributed by
the
employer) under Section 80CCD(2), and Rs.50,000 under Section
80CCD(1b).
On retirement, 60% (lump-sum) of the corpus is taxable, and the
remaining
40% (annuity) is taxable as per slab rates
|
| 4.
|
SSY |
21 years |
8.1% |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
Maturity amount is not taxable on withdrawal.
|
| 5.
|
Senior Citizens Saving Scheme |
5 years |
8.3% |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
TDS applies if the interest on the amount withdrawn on maturity exceeds
Rs.10,000.
The 80C benefit is lost if a premature withdrawal is made.
|
| 6.
|
ULIP |
5 years |
10.1% - 11.9% depending on allocation |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C if the plan is continued for a
minimum of 2 years.
Under Section 10(10D), maturity proceeds are free from taxation if the
ratio of the premium payable to sum assured does not exceed 10%. (20%
for
policies purchased before 1st April 2012).
|
| 7.
|
NSC |
7.6% |
10.1% - 11.9% depending on allocation |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
Interest earned is tax-free.
|
| 8.
|
Life Insurance |
5 years - 40 years |
4.5% - 5% |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
No taxation on death benefit payout.
Policy proceeds are taxable in the case of annuity or pension payouts.
|
| 9.
|
Pension Plan |
5 years |
7% - 10% |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
One-third of the corpus receivable on plan maturity is tax-free, the
rest
is paid as an annuity and charged to tax.
|
| 10.
|
ELSS |
3 years |
11% - 17% |
Any amount invested/deposited up to Rs.1,50,000 can be deducted from
total
annual taxable income under Section 80C.
Returns over Rs.1 lakh taxed at 10% under LTCG.
|
How is ELSS better?
ELSS vs Tax Saving Fixed Deposit (FD)?
If you’re trying to figure out which is better
ELSS or FD (5 year fixed deposit):
ELSS has a 3 year lock-in, tax saving FD has a 5 year lock-in.
Returns on ELSS: 11% - 17%.
Returns on Tax saving FD: 7.5%.
ELSS is better than 5 year FD because you get access to your funds in just 3 years, and annual
historical annual returns have been much higher than regular tax saving FDs.
ELSS vs Public Provident Fund (PPF)?
A quick look at which is better ELSS or PPF:
PPF is for creating a safety net on which to retire.
ELSS is for creating wealth and enabling tax savings.
PPF provides great returns if the investment is grown to allow interest to compound over a long
term of 15 years.
ELSS invests in equities which are riskier but more profitable in the short to medium term of 3
years (mandatory lock in) to 5 years.
Depending on your personal preference of whether you aim to generate wealth now or put money
aside for later, ELSS or PPF is a decision of personal preference as they achieve different
goals. ELSS makes money now, PPF gives you a retirement pillow.
ELSS vs National Pension Scheme (NPS)?
A quick look at which is better ELSS or NPS:
Much like the PPF, the NPS is also for creating a retirement corpus.
The point of ELSS is to invest in equities through a mutual fund scheme, with the added benefit
of having your investment amount (up to Rs.1,50,000) exempted from taxable annual income.
While the NPS is a long term investment, it allows for up to Rs.2,00,000 to be exempted from
taxable income allowing for slightly higher savings depending on your tax bracket.
If you wish to earn wealth in the short to medium term through equity mutual fund schemes ELSS
is better.
If you wish to create a decent sized retirement amount that you’ll only get on retirement NPS
is better.
Again, depending on the investor’s preference for either equity investing or retirement
planning, ELSS or NPS are strong contenders on either side.
ELSS vs Sukanya Samriddhi Yojana (SSY)?
A quick look at which is better ELSS or SSY:
SSY or Sukanya Samriddhi Yojana Account is an investment scheme to enable unorganized workers,
etc. to invest for the future of their female children.
Deposit and withdrawal rules for this scheme differ greatly from a tax saving mutual fund
investment scheme like ELSS.
While both are tax saving investments, ELSS is specifically designed for wealth generation, and
SSY is specifically designed to enable savings.
For a wealth generating investment that will also save Rs.1,50,000 from taxable income, ELSS is
better.
For an investment that’s locked until your girl child is ready to get married or go to college,
SSY is better.
ELSS vs Senior Citizens Saving Scheme?
A quick look at which is a better tax saving investment ELSS or Senior Citizens Saving Scheme:
Senior Citizens Saving Scheme or SCSS can be invested in by people above 60, or 55 in certain
cases.
Senior citizens can invest in ELSS as well - ELSS has a shorter 3 year lock in for funds.
Returns on ELSS are historically higher than those of SCSS.
Both provide for up to Rs.1,50,000 to be exempted from taxation.
ELSS is a better investment option than SCSS depending on goals.
ELSS vs Unit Linked Insurance Plan (ULIP)?
A quick look at which is better ELSS or ULIP:
Both provide the same amount of Rs.1,50,000 to be exempted from taxation.
ELSS is subject to LTCG Tax, ULIP is not.
ULIPs are essentially insurance policies that use a part of the premium to invest and generate
returns just like any other mutual fund scheme.
ELSS are straight up equity market investment schemes with tax benefits.
ULIPs invest in a equity, debt, and hybrid schemes.
ULIPs are a great idea that combine a life insurance policy and mutual fund investment in one
package, but have been criticized for not providing the most of the individual benefits of
either service. A standard life insurance policy, for example, functions better as a life
insurance policy - providing greater benefits. Similarly, a standard mutual fund scheme
investment provides better returns and is easier to navigate should you wish to exit or switch.
ELSS is a better choice to fill the requirement of a tax saving investment scheme with a 3 year
lock in, and nothing more.
ELSS vs National Savings Certificate (NSC)?
A quick look at which is better ELSS or NSC:
NSC has a mandatory 5 year lock in.
ELSS has a 3 year lock in.
Average returns on NSC: 7.6%
Average returns on ELSS: 11% - 17%
ELSS is better when it comes to generating returns in a shorter time frame.
Frequently Asked Questions
How does ELSS SIP work?
It’s simple - you invest a certain amount every
month in this scheme, and it stays locked in for 3 years from the date of investment. So, if a
person wanted to invest their full Rs.1,50,000 Section 80C quota into ELSS mutual funds through
equal SIPs throughout the year, it would look something like this:
Rs.1,50,000 / 12 = Rs.12,500 per month
Rs.12,500 invested in April 2016 will be locked in till April 2019
Rs.12,500 invested in May 2016 will be locked in till May 2019
Rs.12,500 invested in June 2016 will be locked in till June 2019
And so on, until the investor has fulfilled the investment limit.
The tax benefit in the above example can be claimed for 2016-17.
How much can one invest in ELSS in a financial year?
Investors can invest as much as they wish into
ELSS mutual fund schemes, but only Rs.1,50,000 of that can be exempted from taxable income in
any given year.
Is ELSS good for long term investment?
While the mandatory lock in for ELSS schemes is
just 3 years, those investors who have allowed their investment to grow beyond 7-8 years have
seen excellent returns as well. The ELSS mutual fund scheme will continue to invest in equities
even after 3 years, making it a viable option even for long term investments.
Is it good to invest in ELSS?
ELSS is an excellent investment option. The
reason it is so popular is because you can invest how much ever you want in ELSS and claim tax
deductions on up to Rs.1,50,000 of that investment under Section 80C.
ELSS is good because it allows for exposure to the high-risk high-reward equity market through
a tax saving investment, and also allows for diversification - you don’t need to invest the
entire Rs.1,50,000 in the same ELSS mutual fund scheme.
Yes, ELSS is an excellent investment option for wealth generation in the short to medium term
with tax benefits.
